I'm in the exact same boat as well and I think I'm going to go for dream school. I've thought long and hard about it and I know that if there's one thing I want to invest lots of money in, it will be my education, especially a graduate school education. That might mean not having a nice house and car right away, but the quality of education matters so much more to me than those things! Of course, it may be different if you have a family, other financial responsibilities, etc. Other factors that helped me decide was that I want to leave the door open to a Ph.D. and do the medical route as well.
Ultimately, you should go with your gut. When I got spooked at the price tag for the dream school and "settled" on the inexpensive local school, I couldn't stop thinking/stressing about it and I kept fighting back the urge to cry all the time! But now that I changed my mind and have started making plans to make the dream school a reality, I am happy and excited. I think about the debt I will take on as a challenge that I will maneuver with creativity and intellect to conquer! (cheesy but true)